Producers erase decline for FY 2014

In a dramatic development, North Slope oil producers have essentially erased a long-term decline trend that has existed for all but one year since 1989 when two new oil fields began producing in 2002.

An intensive effort in “workovers” of producing wells, to stimulate production, and drilling of new producing wells in the large producing fields, has hiked production over what was expected by the state Revenue Department.

The estimated daily average for fiscal year 2014, which ended June 30, is 530,939 barrels per day compared with the average of 531,639 barrels per day in fiscal year 2013.

With production through May confirmed for eleven months of fiscal year 2014, and preliminary data from June based on daily production tickets, the estimated decline for the North Slope for the fiscal year is calculated at 0.13 percent, or essentially zero, said John Tichotsky, chief economist in the Department of Revenue. The 2013 fiscal year had a decline of 8.2 percent.

The 0.13 percent decline estimate is the second-best annual performance since 1989. There was a 2.6 percent increase in fiscal year 2002 when the Alpine field operated by ConocoPhillips and North Star field operated by BP began producing.

Passage of a change in the state’s oil production tax in 2013, in Senate Bill 21, is being credited for increased activity on the Slope, but a leading critic of the tax change, State Sen. Bill Wielechowski, D-Anchorage, dismissed the new data.

“While the industry may be successful in slightly increasing production before the referendum vote (to repeal the new tax) in August, the fact is that the long-term projections by the (Gov. Sean) Parnell administration show a 45 percent decline in oil production over the next decade,” Wielechowski wrote in an email.

However, the state’s official long-term production estimates, published annually in November, were put together before the new tax law took effect and do not reflect the level of response shown by the companies recently.

Alaska voters will decide whether to repeal SB 21 on the Aug. 19 primary ballot, with a yes vote to repeal and a no vote to keep it in place.

“The number one statistic that matters most to Alaskans is production, not forecasts or projections. The news that we have ‘stopped the drop’ in our oil production for the first time in more than 10 years is no surprise to those of us who believe creating a competitive investment climate will bring more rigs, more jobs, and more oil to the state.

“Proof of this concept is now out for everyone to see; oil tax reform is working,” said Kara Moriarty, president and CEO of the Alaska Oil and Gas Association. “More production also means more royalties going into the Permanent Fund, as a result of the change. It’s also another compelling reason to vote no on ballot measure 1 on Aug. 19.”

On June 10, in a press release, Wielechowski also said he would drop his opposition to SB 21 if the industry produced one barrel of new production above the 2013 average of 531,000 barrels and it resulted in new revenue.

“If SB 21 produces new oil, even ONE new additional barrel, and this production results in new revenue to the state, we will drop our support for revising oil taxes, Wielechowski said in the June 10 release.

State Sen. Hollis French, D-Anchorage, joined Wielechowski in issuing the release.

The revenue picture will take some time to finalize, but the first estimate shows the producers missed Wielechowski’s challenge by only 701 barrels in the per day average.

State agencies monitor oil production closely because about 90 percent of state revenues come from oil royalties and taxes. The Alaska Oil and Gas Conservation Commission, an independent state regulatory agency, supervises and tests the meters that measure the flow of oil.

The long-term average decline from the North Slope fields has been about 6 percent since 1989. Last December, forecasters in the Department of Revenue, anticipating better performance from producers based on the tax change, estimated that the fiscal year ending June 30 would see a 4.4 percent average decline.

The buildup of production surprised state officials. By March and April it appeared there might even be a slight net increase over last year but June production rates are somewhat down because of maintenance on production facilities. That results in a lower production rate for that month, although the barrels will eventually be produced.

Tichotsky said the figures may look a little better when the official June production numbers come in.

“The production for June and all of 2014 will be officially finalized sometime in the first week of August, when the June production off-take reports come in, and will likely be slightly higher and bring us closer to one-tenth of a percent of a zero decline,” he said.

By comparison, one-tenth of a percent is within the 0.25 percent margin of error range for the meters that measure the oil production.

Tichotsky said state economists Loren Crawford and Tim Harper, in the Revenue Department’s Economic Research Group, compiled the production numbers.

A number of new oil development projects have been announced for the North Slope since mid-2013, when SB 21 passed the Legislature, but it takes time for new projects to be approved by company boards of directors and to secure permits for construction.

ConocoPhillips, one of two major North Slope operators, has three new projects planned that will result in a net addition of 40,000 barrels per day of new Slope production by 2018, according to Scott Jepsen, the company’s vice president for external affairs.

BP Exploration Alaska, which operates the large Prudhoe Bay field, is planning a major development project in the western part of the field that will eventually add 40,000 barrels per day of production, the company has said.

In the short-term, however, both BP and ConocoPhillips have boosted production through more intensive drilling and workovers of existing wells. Both companies have added more drilling rigs and boosted activity levels.

BP’s work on projects to boost well production is up 20 percent over last year, and spending on “production-enhancement” work is up 40 percent, company spokeswoman Dawn Patience said.

Tim Bradner can be reached at tim.bradner@alaskajournal.com.

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